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Tuesday, 11 April 2017

Sterling claws off three-week low, data deluge looms

Britain's sterling climbed versus both the dollar and the euro on Monday, clawing up from a three-week low ahead of a packed week of data expected to show a tightening squeeze on the country's consumers.

The rises pushed the pound back to $1.2400 and buying 1.1720 euros and came despite signs that UK households are becoming more cautious about their spending.

Figures from credit card firm Visa showed both a dip in monthly spending in March and the weakest quarterly rate since 2013 after what had been an strong end to 2016.

For economists it was a taster ahead of inflation data on Tuesday, which is expected to remain comfortably above the Bank of England's 2 percent target, keeping the pressure on disposable incomes and potentially sterling.

"You could see the correction in the pound extend this week if the data continues to be weak," said ING strategist Viraj Patel.

"It is the squeeze on consumer spending story really," he said, adding that if that squeeze cooled inflation it could also snuff out recently rekindled speculation of a BoE rate hike later this year.

Wages data on Wednesday will also be closely watched as will any further signals of the early mood in Brexit negotiations.

The remaining 27 European Union members have sketched out their stance, but will lay down more formal guidelines on April 29.

"What you are looking for is another of layer of bad news," said Patel. "There is a clear mismatch from what the UK wants and what the EU wants, so I think we are in for a bit of a reality check here."

The day's rise from sterling was its first in three sessions and came after its first weekly fall in four last week.

Currency market positioning data from the Commodity Futures Trading Commission released on Friday showed a small scaling back of 'short' positions on the pound, although they remain near the highest level on record.

Volatility gauges for a number of central and eastern Europe's main currencies spiked to their highest since last June's Brexit vote on Monday, as traders took out insurance bets ahead of France's upcoming elections.

One-month options for the Czech crown and Hungarian forint versus the dollar both jumped to their highest since the UK referendum, while the equivalent for Poland's zloty matched a level last seen in November which was also the highest since the Brexit vote.

The final round of French elections is set to take place on May 7 with markets nervous about right-wing candidate Marine Le Pen's anti-euro campaign promises.

Last week's move by the Czech central bank to remove its cap on the crown versus the euro has also made it more volatile.